Interest rates tipped to stay on hold

Reserve Bank Governor Alan Bollard is delivering his Monetary Policy Statement next Thursday at 9am. Photo / Mark Mitchell.

Official interest rates are likely to stay on hold next week, says Deutsche Bank economist Darren Gibbs.

In a preview published today, Gibbs said it is "...virtually certain that the OCR will be maintained at 2.5 per cent," when the Reserve Bank makes its announcement next week.

Governor Alan Bollard is also having a media conference on that day and releasing the regular Monetary Policy Statement.

The official cash rate now sits at a record low 2.5 per cent, and has been unchanged since it was cut by 0.5 per cent on April 30, 2009.

Few think there has been enough change in the economic outlook to justify any increase in the OCR.

"Thus the focus for markets will be on how the Bank describes the economy and consequent policy outlook," says Gibbs.

"On that score, with only a small number of economic reports published since the Bank's October policy review, most of which have offered few challenges to the policy stance, we see little scope for innovation in the Bank's thinking (and thus little room for surprise either)."

He said he expected the bank would repeat its October conclusion that "...we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010."

"We continue to favour a slightly earlier first hike in the OCR but much will depend on how the economy performs over coming months, especially over the important Christmas trading period."

"The focus for markets will be on the Bank's updated economic projections (updating those last published in the September MPS) and, in particular, the Bank's characterisation of what these imply for the likely stance of monetary policy in 2010."

There had been little in the way of recent data that would "advance the case for the bank to begin raising the OCR sooner than it had signalled, said Gibbs.

Housing sales appeared to have been little changed over the past two months after rising substantially over the first half of this year.

Be that as it may, house prices have continued to rise, helping to fuel a recovery in new dwelling consent issuance from historic lows.

Business surveys have also shown some promising signs that the shakeout in the labour market "may have largely run its course, the realisation of which over time would probably encourage greater spending."

The continued rise in global commodity prices in the dairy sector was "a clear positive surprise, providing some counter to continued currency strength and easing concerns about balance sheet risks both in the farm sector and in the banking sector."

"As in October we expect the bank will cite evidence that the economy is growing again, albeit tentatively, and that increased activity is also being seen in New Zealand's major trading partners."

Gibbs said he expected that the bank would continue to fret about "significant vulnerabilities and challenges to be worked through in many economies". These would include the high value of the NZ dollar, and the sustainability of the housing recovery.

The Reserve Bank would again conclude that "...we see no urgency to beginwithdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010."

- NZ HERALD STAFF